Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
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Question
Chapter 20, Problem 4P
Summary Introduction
To calculate: The NPV of the merger, and whether the merger should be undertaken or not.
Introduction:
Merger:
An agreement between two existing companies that combines them to form one single company is termed as a merger. This is done for the expansion of business, share in the market and value of shareholders.
Synergistic benefits:
Synergistic benefits arise out of the merger of two or more entities, which is a basic term meaning that the performance and value of the combined entity will be more than those of the individual entities.
It is the difference between the PV (present value) of
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XYZ Auto, a national autoparts chain, is considering purchasing a smaller chain, ABC Auto. Pit Row’s analysts project that the merger will result in incremental net cash flows of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. The Year 4 cash flow includes a terminal value of $107 million. Assume all cash flows occur at the end of the year. The acquisition would be made immediately, if it is undertaken. ABC’s post-merger beta is estimated to be 2.0, and its post-merger tax rate would be 34 percent. The risk-free rate is 8 percent, and the market risk premium is 4 percent. What is the value of ABC Auto to XYZ Auto?
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a. Compute the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations.
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Yes
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Chapter 20 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
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